-In the figure above, Lourdita faces a 0.5 probability of receiving $3,000 and a 0.5 probability of receiving $9,000. Her cost of bearing this risk is the distance from
A) A to F.
B) A to D.
C) B to E.
D) C to E.

Question

-In the figure above, Lourdita faces a 0.5 probability of receiving $3,000 and a 0.5 probability of receiving $9,000. Her cost of bearing this risk is the distance from
A) A to F. 
B) A to D. 
C) B to E. 
D) C to E.

Quizplus · Accepted Answer

The cost of bearing risk is typically represented by the difference between the expected value of the risky prospect and the certainty equivalent. In this context, the certainty equivalent is represented by point C, and the expected value of the lottery is represented by point B. Therefore, the distance from B to E represents the cost of bearing the risk.

-In the Figure Above, Lourdita Faces a 0